A Keynesian endogenous growth theory with a rigorous microeconomic foundation

Friday, October 5, 2012: 4:55 PM

Masayuki Otaki, Ph.D.
,
Institute of Social Science, University of Tokyo, Tokyo, Japan

Abstract

Extending the effective demand theory developed by Otaki (2007, 2009), we construct a demand-driven endogenous growth theory with a rigorous microeconomic foundation. An accelerator-principle investment function is derived by the intertemporal maximization behavior of monopolistic competitive employers. Under this investment function, an economy endogenously begins expanding even if the stability condition for goods markets is satisfied.

There are three factors that determine the equilibrium growth rate: the degree of monopoly (the inverse of the price elasticity of each good) η; marginal propensity to saving s; Mashallian k that can be manipulated by the government and is denoted by κ. The higher value of s and the lower value of η and κ, the more rapid the expansion of the economy.